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Energy efficiency needs more research: Column

Before we spend too much more government money pushing energy efficiency, we need more rigorous analysis to identify where consumers are systematically making mistakes and how large these mistakes are.

In his State of the Union, President Obama set a goal to "cut in half the energy wasted by our homes and businesses over the next 20 years."

Many Americans get nervous when we hear the government wants to step into our homes. We think we make prudent choices without conferring with Uncle Sam. We shop sales. We clip coupons. We refinance our mortgages. So is the president right? Do we systematically waste energy? And if so, can he help us save?

His administration and many states say yes. Federal and state governments spent nearly $10 billion on energy efficiency programs in 2011. In many cases, these programs do help Americans save energy. In other cases, consumers may be making sensible choices, and it's the lawmakers who are confused. The trouble is, we have shockingly little information to help tell which is which.

Now, thanks to big data and cutting-edge analytics, we're working to fill the void with the E2e Project. A new partnership between the Massachusetts Institute of Technology and the University of California at Berkeley, the E2e Project helps inform the decisions of both consumers and lawmakers by deeply researching all aspects of energy efficiency.

First, we're uncovering when government programs do work -- that is, when they make up for market failures. Markets malfunction when consumers are poorly informed. People might, for example, sign up for mortgages they don't understand. The government can then step in to give people the information they need to make smarter choices. Decisions about energy can confuse, too, because we buy our houses, cars and appliances separate from the energy that powers them. That's why the government labels cars and appliances with fuel- and energy-efficiency labels, to help us factor in the energy costs.

Not all market failures are against our own best interests. But because they harm others and are not good for the country as a whole, the government should step in. In these cases, we're researching the best courses of action.

The big elephant in the room is climate change, which the president also committed to tackle in his second term. The costs of climate change are potentially huge, and those costs are not reflected in the gasoline or electricity prices we pay. No sticker tells us how much carbon a Cadillac emits over its life. Some of us might not care even if such a sticker did exist.

But, some government-mandated energy-efficiency improvements made with climate change in mind might not add up. That's understandable, as energy reductions from efficiency investments can be tough to measure.

Take, for example, a homeowner who wants new insulation in his attic and needs to hire a contractor. In typical calculations, savings on heating and cooling bills outweigh the costs of hiring that contractor. But those calculations can ignore some other costs. A homeowner may hesitate because he doesn't want to spend a Saturday cleaning out his attic or the contractor may not perfectly lay the insulation to get maximum savings. In other words, the human part of the equation is not completely added in.

The same is true when designing energy efficiency laws and programs. Before we spend too much more government money pushing energy efficiency, we need more rigorous analysis to identify where consumers are systematically making mistakes and how large these mistakes are: Which are wasting more, businesses or households, lighting or HVAC systems? Where will our investments give us the best return?

We don't know, at least not yet.

Economists have a joke about our profession's faith in the power of markets and self-interest. It goes like this: Two economists are walking down a street. One spies a $20 bill lying on the sidewalk, near his friend's foot, and says, "Are you going to pick that up?" The friend says, "It must be counterfeit. If it were real, somebody would've picked it up already."

When it comes to energy efficiency, no one has learned how to distinguish the real bills from the counterfeits. Our research will help put those real bills in Uncle Sam's pocket and the pockets of all Americans.